A balance sheet is a statement of the financial position of a business that lists the assets, liabilities, and owners' equity at a particular point in time. In other words, the balance sheet illustrates a business's net worth.
Learn more about what a balance sheet is, how it works, if you need one, and also see an example.
What Is a Balance Sheet?
The balance sheet is the most important of the three main financial statements used to illustrate the financial health of a business. The other two are the income statement and cash flow statement.
A balance sheet helps business stakeholders and analysts evaluate the overall financial position of a company and its ability to pay for its operating needs. You can also use the balance sheet to determine how to meet your financial obligations and the best ways to use credit to finance your operations.
The balance sheet may also have details from previous years so you can do a back-to-back comparison of two consecutive years. This data will help you track your performance and identify ways to build up your finances and see where you need to improve.
Alternate name: Statement of financial position
It's a good idea to have an accountant do your first balance sheet, particularly if you're new to business accounting. A few hundred dollars of an accountant's time may pay for itself by avoiding issues with the tax authorities. You may also want to review the balance sheet with your accountant after any major changes to your business.
How a Balance Sheet Works
All accounts in your general ledger are categorized as an asset, a liability, or equity. The items listed on balance sheets can vary depending on the industry, but in general, the sheet is divided into these three categories.
Assets are typically organized into liquid assets, or those that are cash or can be easily converted into cash, and non-liquid assets that cannot quickly be converted to cash, such as land, buildings, and equipment. They may also include intangible assets, such as franchise agreements, copyrights, and patents.
Liabilities are funds owed by the business and are broken down into current and long-term categories. Current liabilities are those due within one year and include items such as accounts payable (supplier invoices), wages, income tax deductions, pension plan contributions, medical plan payments, building and equipment rents, customer deposits (advance payments for goods or services to be delivered), utilities, temporary loans, lines of credit, interest, maturing debt, and sales tax and/or goods, and services tax charged on purchases.
Long-term liabilities are any that are due after a one-year period. These may include deferred tax liabilities, any long-term debt such as interest and principal on bonds, and any pension fund liabilities.
Equity, also known as owners' equity or shareholders' equity, is that which remains after subtracting the liabilities from the assets. Retained earnings are earnings retained by the corporation—that is, not paid to shareholders in the form of dividends.
Retained earnings are used to pay down debt or are otherwise reinvested in the business to take advantage of growth opportunities. While a business is in a growth phase, retained earnings are typically used to fund expansion rather than paid out as dividends to shareholders.
Sample Balance Sheet
BALANCE SHEET as at __________ (Date)
|Current Assets:||Current Liabilities:|
|Cash in Bank||$18,500.00||Accounts Payable||$4,800.00|
|Petty Cash||$500.00||Wages Payable||$14,300.00|
|Net Cash||$19,000.00||Office Rent||—|
|Accounts Receivable||$5,300.00||Federal Income Tax Payable||$2,600.00|
|Total Current Assets||$55,200.00||Customer Deposits||$900.00|
|Fixed Assets:||Union Dues Payable||—|
|Buildings||$330,000.00||Sales Tax Payable|
|Less Depreciation||$50,000.00||Total Current Liabilities||$24,950.00|
|Net Land & Buildings||$430,000.00|
|Net Equipment||$33,000.00||Total Long-Term Liabilities||$195,000.00|
|Owner - Draws||$50,000.00|
|Total Owners' Equity:||$298,250.00|
|TOTAL ASSETS||$518,200.00||LIABILITIES AND EQUITY||$518,200.00|
Do I Need a Balance Sheet?
An up-to-date and accurate balance sheet is essential for a business owner looking for additional debt or equity financing, or who wishes to sell the business and needs to determine its net worth.
Incorporated businesses are required to include balance sheets, income statements, and cash flow statements in financial reports to shareholders and tax and regulatory authorities. Preparing balance sheets is optional for sole proprietorships and partnerships, but it's useful for monitoring the health of the business.
- Balance sheets are an important tool for assessing and monitoring the financial health of a business.
- They typically include assets, liabilities, and owners' equity.
- The U.S. government requires incorporated businesses to have balance sheets.
U.S. Securities and Exchange Commission. "Beginners' Guide to Financial Statement." Accessed June 20, 2020.
QuickBooks. "What Are Current Liabilities? – Definition and Example." Accessed June 20, 2020.
FreshBooks. "What Is Liability in Accounting?" Accessed June 20, 2020.
Corporate Finance Institute. "Retained Earnings." Accessed June 20, 2020.